To Integrate or Not to Integrate


Integration is always a matter of degree. It can be complete, partial, or minimal, as in cases in which the acquired organization is operated as a stand-alone “portfolio” company.

  • Complete integration occurs when the acquired entity fully takes on the properties of the acquiring firm, including that firm’s styles of operating, infrastructure, identity, brands, and so on. Functions and lines of business are melded into one.

  • Partial integration occurs when some but not all of the acquired firm’s systems, practices, and policies are merged with those of the acquiring firm. For example, the acquirer may handle all accounting and financial functions, leaving the acquired company substantial independence in product development, marketing, and so forth.

  • Portfolio refers to an acquired company undergoing no or very little integration, as occurs when it is held as a subsidiary. There are few examples of “pure” portfolio companies: Acquirers usually exert some influence on an acquired firm’s practices.

Full integration is not always appropriate. In some cases the acquired company’s business and human capital base are so different that it should be left to its own devices as a portfolio company. Some operational redundancies usually can be combined, lowering costs, but full integration might create a huge mess and sap the unique qualities of the acquired firm. We believe that a substantial number of acquisitions fail to return value because integration is pursued that never should have been attempted.

Berkshire Hathaway is undoubtedly the world’s best exemplar of the portfolio approach. Chairman/maestro Warren Buffet acquires exemplary companies with outstanding management and holds them under the Berkshire Hathaway umbrella. He gives portfolio company managers and employees remarkable independence in pursuing their goals. Any other approach to managing subsidiaries in such diverse fields as shoemaking, carpets, chocolates, home care, and insurance probably would fail. Buffet’s confederation of companies has produced highly satisfied shareholders, and satisfaction is also high among portfolio company managers. As Buffet reported to shareholders in Berkshire’s 2001 annual report: “We have as fine an array of operating managers as exists at any company. . . . The ability, energy and loyalty of these managers is simply extraordinary. We now have completed 37 Berkshire years without having a CEO of an operating business elect to leave us to work elsewhere.” This remarkable lack of turnover contrasts sharply with the record of executive retention after most acquisitions. According to one study, 47 percent of the executives of acquired firms leave within the first year, and 75 percent within the first three years.[3]

Sara Lee, in contrast to Berkshire Hathaway, has taken a partial portfolio approach to its acquisitions. Its pattern has been to pool marketing and retailing strategies but leave other aspects of a portfolio company’s operations independent. Operating models from one profit center (e.g., hosiery) are not imposed on another (e.g., foods). Decentralized management structures partition the corporation into distinct business centers, each led by an executive with a high degree of authority and accountability.

The portfolio approach is not applicable to all acquisitions, for example, when one airline acquires another or one retail banking corporation acquires another in an adjacent geographic region. These unions typically require full or partial integration of operations, management, and personnel if the goals of the deal are to be achieved.

A Decision Framework

How does one know which level of integration is optimal for success? Should integration be full, be partial, or take a portfolio approach? If integration is called for, should it proceed rapidly or be done in a piecemeal fashion? These are important questions. To help executives answer them, we have developed a practical framework (Figure 8-2) that can help decision-makers do three things:

  1. Know themselves, their target, and the difference between them

  2. Estimate the potential scope of integration

  3. Recognize the pace at which integration should proceed

    click to expand
    Figure 8-2: An Integration Framework

The horizontal axis in Figure 8-2 refers to “forces for integration,” the factors that push the acquirer and the target toward each other. Those forces may be strategic intent, human capital requirements, core business process requirements, or any combination of the three. The stronger those factors, the stronger the need for integration. Since our principal interest is the people side of acquisitions, let’s focus here on human capital requirements.

In terms of human capital, the forces for integration are low when an acquisition does the following:

  • Meets a need for the product, patent, location, and so on, but not the employees

  • Brings with it employees who are easily substituted for by new hires (i.e., employees with low firm-specific skills)

Conversely, the forces for integration are high—again from a human capital perspective—when the acquisition does the following:

  • Creates opportunities to leverage or join various people-driven capabilities, such as sales and research and development (R&D)

  • Requires collaboration on projects or contracts

  • Presents significant new opportunities to attract, retain, and develop talent through integration

These are precisely the factors that often are overshadowed by traditional concerns about the price of the deal and the identification of physical assets to keep and to sell.

As is indicated on the vertical axis of the decision framework matrix in Figure 8-2, barriers to integration can be high or low. Life is full of human capital barriers to integration. They come to varying degrees with every deal. Some of those barriers arise because of differences between workforces; others arise because of differences in the way workforces are managed. In terms of human capital, those workforce barriers to integration are high when the acquired company does the following:

  • Has a very different demographic profile (age, gender, ethnicity)

  • Differs culturally or linguistically

  • Has a different skill base

Barriers in the form of differences in workforce management practices exist when, for example, the acquired company does the following:

  • Defines jobs with a different degree of breadth

  • Differs in terms of the access to autonomy and information given to employees

  • Uses different methods of selection, training, and development

  • Locates authority for decisions at different levels (degree of decentralization)

  • Differs in pay practices (e.g., pay relative to market, the mix of fixed and variable pay, the use of stock options)

That’s a long list of integration hurdles, but each is important and should be pondered as part of pre-deal due diligence. The same list should be revisited when a deal has been consummated and people are ready to move forward with integration.

start sidebar
Myth Buster: Quicker is Better

The conventional wisdom holds that acquirers should move very quickly to integrate their acquisitions. Some people make an analogy to pulling off an adhesive bandage, which is painful. Drawing out the process makes the pain last longer, and so it is best to do it quickly.

This advice may be well suited some cases but not to others. The best approach to full integration depends on the strength of the barriers arrayed against it. When those barriers are high, slow integration (upper-right-hand quadrant of the Figure 8-2 matrix) is generally more likely to succeed. Only when the barriers are low (lower-right-hand quadrant) should quick integration be pursued. Consider these examples:

  1. Nortel Networks and Bay Networks. These firms had many reasons to come together, but the barriers were high because of major differences in their cultures. Those barriers suggested a go-slow approach. Nortel moved with caution; for example, major changes in compensation did not take place until after a year had passed. Slow integration served the integration objectives well.

  2. Union Pacific and Southern Pacific Rail. The 1996 merger of Union Pacific (UP) and Southern Pacific created the largest U.S. railroad. At the time promised economies of scale made the deal appear sensible, but high barriers turned Union Pacific’s rushed integration into a train wreck. Union Pacific should have integrated more slowly with more thoughtful planning.

end sidebar

[3]J. S. Lublin and B. O’Brian, “When disparate firms merge, cultures often collide,” Wall Street Journal, February 14, 1997, A9.




Play to Your Strengths(c) Managing Your Internal Labor Markets for Lasting Compe[.  .. ]ntage
Play to Your Strengths(c) Managing Your Internal Labor Markets for Lasting Compe[. .. ]ntage
ISBN: N/A
EAN: N/A
Year: 2003
Pages: 134

flylib.com © 2008-2017.
If you may any questions please contact us: flylib@qtcs.net